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Deutsche Bank Vows to Focus on Clients With a New Culture of Ethics

By Jack Ewing May 19, 2014 7:53 pmMay 19, 2014 7:53 pm

FRANKFURT — As the banking sector tries to distance itself from the industry practices that helped plunge the globe into financial crisis, Deutsche Bank is doing its best to show it has learned the lessons of the past.

But unlike other big European banks that have sought to atone by shrinking the investment bank operations that created so much havoc, as UBS of Switzerland and the British bank Barclays have done, Deutsche Bank intends to keep playing in the global big leagues.

The question is just how successful it will be in remaining the biggest European rival to Wall Street giants like Goldman Sachs and JPMorgan Chase in investment banking.

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Though many global multinational banks — including HSBC, Standard Chartered and, on Monday, Credit Suisse — have been forced to pay billions in fines over various scandals and wrongdoing, Deutsche Bank has been among the loudest in promising to reform itself.

The bank’s shareholders, which will gather for the bank’s shareholders meeting here on Thursday, will most likely press executives on how real and effective those vows will be, or can be, in the cutthroat global investment banking arena.

On Sunday, the bank provided further evidence of what it argues is a sincere effort to address its shortcomings. Deutsche Bank said it would raise 8 billion euros ($11 billion) in new capital to reduce its dependence on borrowed money and to cushion against any future financial shocks.

That new capital, to be raised from shareholders and the royal family of Qatar, is designed in part to answer criticism that Deutsche Bank coasts on an implicit guarantee from German taxpayers because it cannot be allowed to fail.

The move will dilute existing shareholders, and the stock fell about 1.4 percent in Frankfurt trading on Monday.

Nonetheless, the bank’s executives say they are planning for long-term health.

Anshu Jain, the co-chief executive of Deutsche Bank, insists that the bank can still compete in the rough-and-tumble sector of investment banking. He said Monday that the bank was the only “significant global European firm left standing” in the vast market for bonds and other securities that pay a fixed return based on interest rates.

At the same time, Mr. Jain said that Deutsche Bank was a much more ethical and responsible institution than in the past.

“Everything has changed,” Mr. Jain said in a conference call with analysts. “If you take a look at the way we promote people, the way we compensate people, the deals we do, the clients we adopt, there is a meaningful and significant difference between our business model five, six, seven years ago and today.”

Some of those efforts even extend to changing long-set ways of the locker room culture of Wall Street. A recent internal video for traders outlined a code of conduct that has echoes of Emily Post. Vulgarities are forbidden; indiscreet and crass chatter is discouraged.

Stephan Leithner, a Deutsche Bank director, has gone as far as to hand out laminated cards with 18 bullet points including “do what is right — not just what is allowed,” and put “long-term success over short-term gain.” On the back of the card is no text, just a coating that serves as a mirror, symbolically telling traders to take a good look at yourself, where integrity needs to begin.

But Deutsche Bank acknowledged that investment banking would not be as profitable as it once was, when banks were free to use more borrowed money. The investment bank is aiming for a return on equity, a common measure of bank profitability, of 13 to 15 percent. Before the crisis, the goal was 25 percent.

“Those days are over,” said Harald Benink, a professor of banking and finance at Tilburg University in the Netherlands. “Having higher capital buffers doesn’t preclude having active investment banking. But the return on equity will be much lower.”

Deutsche Bank also has a disadvantage when compared to its American rivals because its home market, Europe, is still sapped by weak growth. And it faces the tougher rules that United States regulators impose on foreign banks.

Mr. Jain, who shares chief executive duties with Jürgen Fitschen, put his personal reputation on the line when he announced at a news conference in September 2012 that the bank would remake itself to be more focused on the interests of society and its clients.

Since then, Deutsche Bank has established mandatory seminars on ethical leadership for top managers and added hundreds of compliance enforcers. The bank has changed its compensation practices in an effort to discourage traders and other employees from an undue emphasis on short-term profit. It has closed units that engaged in risky practices like proprietary trading — the wagering of the bank’s own money in financial markets, which can sometimes put banks in competition with their own clients.

Outside the bank there is considerable doubt about the commitment of Deutsche Bank and other lenders to change their behavior. Margit Osterloh, a professor at Zeppelin University in Friedrichshafen, Germany, who has written extensively about corporate ethics, argues that bonus systems are inherently flawed.

Systems that tie pay to achievement of revenue targets or other financial goals are too easy to manipulate, she said, and they encourage employees to pursue self-interest.

“With a variable, pay-for-performance system you will select the people most motivated extrinsically,” Ms. Osterloh said. “You will have fewer people who really like the company, who really like the job.”

Mr. Jain faces additional pressure because he was previously head of Deutsche Bank’s investment banking unit, the source of most of the bank’s current legal problems. In its most recent quarterly report, Deutsche Bank estimated its potential future legal financial liabilities from those problems to be €2 billion. That would be in addition to the more than €3 billion in fines it has already paid.

One rationale for the €8 billion capital increase announced Sunday, in fact, was to provide a bigger cushion should the cost of scandals continue to grow.

Deutsche Bank also has significant operational challenges in investment banking, which accounts for only about 10 percent of the bank’s 97,000 employees but nearly half of revenue, which totaled €8.4 billion in this year’s first quarter. As Mr. Jain acknowledged on Monday, profits in investment banking have suffered because of a decline in trading volume by clients and record-low interest rates, which squeeze profit margins and make it harder for banks to attract deposits.

But Mr. Jain argued that the longer term prospects for Deutsche Bank were good because of what was likely to be growing demand for bonds and other securities that pay a fixed return. European companies, which traditionally have depended on bank loans, are increasingly issuing bonds when they need credit. And Europe’s growing population of retirees wants to invest money in such bonds because of the steady income they generate.

So-called fixed income is a Deutsche Bank strength. So far this year it is the No. 1 issuer of debt in Europe, according to Dealogic, a market research firm. It is third worldwide, behind JPMorgan and Barclays, which has announced plans to scale back its investment bank.

As Deutsche Bank sees it, there is no conflict between making money in those businesses and being a good citizen.

“Investment bankers are making more money than average, that’s clear,” Mr. Leithner, the Deutsche Bank director, said. But, he added, “I think the two things are compatible.”

Trading has often generated most of Deutsche Bank’s profit, but traders have also been the source of many legal problems:

• FEB. 2014 The bank fired three currency traders in New York as regulators worldwide pursued investigations into potential manipulation of the $5-trillion-a-day foreign exchange market.

• FEB. 2014 The bank agreed to pay about €925 million, or $1.27 billion, to settle a 12-year dispute with the heirs of Leo Kirch over the collapse of his media group. The Kirch Group claimed that doubts expressed by Deutsche Bank’s chief executive about the company’s creditworthiness led to its demise.

• DEC. 2013 The bank agreed to pay $1.9 billion to settle claims that it had defrauded Fannie Mae and Freddie Mac in the sale of U.S. mortgage-backed securities before the 2008 financial crisis.